Fudget 2018…

(A perspective on the Budget 2018. Published in Deccan Chronicle on 2/2/2018)

BUDGET- ACCOUNTING ILLUSIONS

This budget is the last full year budget by the BJP before the next general elections. It is, like all budgets, a statement of political intent. This time, the focus is to clearly do something for the farm sector and the economically weaker section of the population. There is a renewed big bag announcement to provide health cover for up to five lakh rupees per family, that would cover more than ten crore families. The second big intent is to provide better income to the farmer by providing a “minimum support price” that is related to the cost of production. Thus, the biggest segments are sought to be addressed by these two big announcements. As far as budgets go, it is a passable budget as it seeks to balance political and fiscal balance.

The mathematics of the budget seem to be driven by an intent to be fiscally prudent. The projected fiscal deficit is not a big number and should not bother us. Everything seems to balance (I have not read the fine print at the point of writing this). However, one thing that bothers me is the long term fiscal impact of providing universal health cover as well as farm produce price supports.

One thing that is clear is that the government is exhausting all sources to raise revenue. Clearly too much money is needed and there is not enough revenue generation. There is no relief to the white collar salaried. There is a tax relief for the MSME, as the lower tax rate of 25% is now extended to companies with turnover of up to Rs.250 crore, as against the earlier limit of Rs.50 crore. Big business is disappointed. In fact the education ‘cess’ on income tax has been raised from three to four percent, pushing the effective marginal rate to 34%.

The government now is a partner in the money we make from stocks. They already taxed short term gains, now their reach extends to long term gains also. Governments are supposed to hold on to their promises. STT was introduced as an alternate to all types of capital gains. Government seems to be desperate to tax us more and more. There is some tokenism to senior citizens.

Infrastructure spend is big like in earlier budgets. Big announcements of new airports (56 of them), food processing parks, more roads, ambitious targets for houses for poor, concessions for women etc also flashed. Clearly, trying to address every segment.

Budget making is a political exercise. Trying to please all constituents is not possible. Revenues are far below what is spent. Unfortunately, asset sales (disinvestment, auction of natural resources etc) are like selling family silver to put a meal on the table. No one seems to mind. One day all the silver will be gone. But then, that is the problem that will be inherited by the future generation. However, no economist or anyone seems to be bothered. Clearly this is unaccountable accounting.

Each succeeding government tries to win votes by giving away more and more things. And this also establishes a sense of ‘entitlement’ among the public that they have a right to get things free.

This budget should not worry the market, but could give a trigger for a correction that is overdue.

R Balakrishnan

1st Feb 2018

 

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Budget 2018 etc

This budget comes as the last full year budget from the government. The next budget should be a ‘vote on account’ if elections are going to be held as per schedule or earlier. Thus, this budget has to address the 2019 polls.

The roll out of GST has made things better for the organized players. Yes, could be some teething problems, but outcome is good. The last budget expected a fiscal deficit of 3.2 % for the year 2017-18. Given the momentum in our capital markets, technically, we will probably be within that number.

In 2015, the government had promised to bring down the corporate income tax rates from 30% to 25%. IF this is fulfilled, it will boost sentiments all round. Will he opt for the full cut in this budget or phase it out, is what I would watch out for. Given that the promise is three years old, the intent seems to be weakening, so do not be surprised if there is only some partial reduction this time. In any case, some benefits will be expected.

I do not wish to hazard a guess on what the Oil prices will be in this year. Firm oil prices are not good for us, but good for OPEC. It will have an indirect bearing on what inward remittances flow in. Our Oil import bill be close to ninety billion US dollars. A ten percent rise in oil prices ( the ninety billion is at an average of around $55 per barrel) means an extra ten billion to be found. Street prices will be hiked as it is very unlikely that the government will give up on its taxes etc. All of us want Oil to be covered under GST. I do not think the government finances can afford that as of now.

Expect some big news for the salaried. This goes against popular belief, but I suspect that there would be big time relief on this. There are two routes to take. One is to do a big bang change by raising the tax exemption limit to beyond ten lakh rupees a year. The other one is to do away with all the exemptions, deductions etc and announce a low flat rate of five or ten percent across the board. This would be a good thing to happen, but I do not know how the government mind works. Of course the skeptic in me tells me that the middle class salaried group is not an important vote bank, so does not matter and not worth bothering about.

This budget will also have the Railways finances included. We can only hope that the Railways do not want any support, given that they have aggressive fund-raising plans through vehicles like IRFC and other PPP initiatives.

The global economy is booming. Foreign money is also pouring in. Good times for India. Corporate India is healthy. In the three years, most companies have reduced their indebtedness.  The PSU Banks have been pumped with steroids once again.

All ingredients are there for our economy to grow. The details in the budget will be there for budget talks etc. Budgets should be routine financial plans and nothing more. Yes, given that we are going in an election year next, some schemes etc will have to announced. The key thing I am expecting is a big government spend on infrastructure which will spur growth and encourage the private sector also to invest more.

Investment strategies do not change with budgets. What we see is that every year, we talk about ‘winners’ and ‘losers’. However, at the end of the year, we do not see much change in the fortunes.  Today, we have reasonable levels of tariffs. So changes would be very nominal, unlike in the eighties, where tariffs could help or hurt a business.

While on the budget, there is a document called the ‘economic survey’. It is a pre cursor to the budget and tells us the numbers. However, it is cleverly presented just a day or two before the budget so that no one gets time to digest it in full.  Unlike for companies, we never see any ‘audited’ accounts for the nation. It is all “Estimated” “revised” etc. So, it is more a matter of faith.

What matters to me is prices, inflation and investment safety and returns.  Budgets generally are bad for the first two because each successive budget increases the subsidies and freebies so that politicians can supposedly ‘please’ their constituencies. All done in the name of ‘welfare’. It is also worrying at a big level because there is no public debate on the distribution of the money that is collected and borrowed by the government.

 

 

 

BULL RUN FOREVER….

(My recent column in the Deccan Chronicle.  The prices worry me. Not because the companies will collapse, but investments at this stage are in the realm of hope… Markets can keep being like this for long. NOT forever… Enjoy the ride..)

COME EASY, GO EASY

This bull run has given joy to everyone who has made a trade. All that seems to be needed is to buy something. By and large, the bull run has spread across the spectrum of the listed universe. Newsletters, research reports, tip sheets and all are vying with each other to find out new names to put on their sheets. And in most cases what I see is that by the time the research reports are out, most of the upside has already happened in the stocks.

To my memory, this run in the market is as wild as the one that happened in 1991-92 before the collapse in April 1992. There the magnitude was amazing. The index went up from 1180 in April 1991 to a peak of 4546 in April 1992. And in April 1993 it hit 1980. Fortunes were made, fortunes were lost and the system had been wounded with the securities scam that had fed this bull run.  Stocks were trading at an AVERAGE P/E of 57 times, at peak! Today, they are closer to 25.

This time round, the run up is more widespread. More participants in the market and the big presence of the FIIs. In the 1991-92 run up, there was only domestic money. The total market capitalization today is in excess of Rs.1,50,00,000 crores. In 1990-91, the total market capitalization was under Rs.1,00,000 crores. 1991-92 bull run pushed it by nearly three and a half times.

In 1991, the average daily turnover on the BSE (which probably accounted for 70 percent of business in India) was under Rs.200 crores. Today, the BSE does around Rs.6,000 crores a day and the NSE does around Rs.30,000 crores.

This is not to say that the present market run up has a long way to go. Of course, it would be foolish to bet on the index. Markets today are fueled by money flows (very aggressive in to India), expectations (quite high) and participation (high).  Of course, every market is subjected to ‘event’ risks.

The one other big factor that is pushing the markets is the China factor. Indian commodity companies were in intensive care, given the scale and size of China presence in most commodities. Today, China has put a brake on production facilities of many commodities, leaving to a revival in demand and massive price push for products from Indian companies. A strong global economy in 2017 after a long time also helped keep commodity prices on a northward trajectory.

While valuations are extremely aggressive, the expectations is that the next round of earnings growth will be in the high teens, which will temper valuations. This may be true for some companies, but betting on a total rebound is optimistic. And looking at the valuations of financials the markets seem to be re-writing the rules of arithmetic.

There are two worry points that will show up. One is that the interest rates are not coming down. The second is that the three-year gift of low oil prices seems to be behind. This puts stress on the finances as well as on inflation.

I do not know what will the trigger that will hurt the markets. Earnings disappointments or a budget that does not please all or resumption of China supplies ( it would be naïve to assume that they would permanently shut down capacities ) could provide that. In the meanwhile, the prices of stocks across sectors seem to move up in turns. Infrastructure, commodities, consumer, retail are fancied. Pharmaceuticals and IT seem to be the next bets as there is a feeling that the ‘worst is behind’.

For the moment, the market is disconnected from the actuals and are playing on hopes. However, I do not like ‘hope’ as a pillar on which to construct an investment strategy. Trade if you must. It is unlikely that there is anything on sale that will give you a good rate of return if held for next five or ten years.

Two and two is always four. Sometimes we like to pretend that it is twenty two. However, if you start believing it, soon you will come to grief. Valuations are a function of earnings. Yes, they can be far from each other for varying lengths of time. However, the farther away that prices are from a reasonable level of valuation, the lower is your chance of getting a good return on your investment. Yes, given that there are limited choices and too many investors, we may not find stocks with deep value or big ‘margin of safety’. Yes, it is possible that prices may not crash. However, it can always happen that prices may have to wait for a very long time. The world is full of troubles and peace is not a permanent thing.

 

 

Chasing stocks- 2018

A very happy 2018 . May all your sales be at prices higher than your buys. May your wealth keep increasing.

(This appears in Today’s Deccan Chronicle) – A more colourful version) http://epaper.deccanchronicle.com/articledetailpage.aspx?id=9729304)

2017 has created more ‘analysts’ and ‘experts’ in equity investing than most of the years that went by.  Step in to 2018 with a prayer. That when you step in to 2019, you still are believers in equities. 2017 has been a year where stocks of “Low” quality have delivered splendid returns and “high” quality stocks have underperformed.

Most seasoned investors have seen this cycle and would have probably stayed out happily. Or some would have set aside some risk capital to make some easy money in this market, with the knowledge that what they are doing is not ‘investment’ but playing the greater fool theory.

After you read this, it would be useful, if you make a list of the holdings in your various demat accounts. Then, imagine that for one year, you will not be allowed to trade in these stocks. Will you wish that a few or many stocks now in your demat account be NOT there? This is a good way to kick the tyres and plan your stock portfolio.

If you have been an active investor in equities, this year, each day would have brought along its roller coaster thrills. Each stock would have moved anything from five to twenty percent either way in a single session. At the end of the day, you count the number of winners. As you keep getting tips, you would have added more and more stocks. Finally, by now, the number of stocks you own would probably rival a mutual fund scheme.

After having done this, I request you to do one more thing.  During the year, the BSE Smallcap index gave a return in excess of fifty percent. Do the math on the portfolio you have. It is very unlikely that you would have made this return if you are in to twenty or thirty stocks. You would have been better off putting your money in to a mid cap fund . Just check out the returns of the funds listed on this page

https://www.valueresearchonline.com/funds/fundSelector/returns.asp?amc=4%2C8799%2C181%2C28%2C302%2C14%2C298%2C319%2C218%2C185%2C24%2C25%2C187%2C27%2C311&cat=10%2C11&exc=susp%2Cclose&rettab=ov

If you thought that you could easily beat a fund, think again.

I know of people who made some stupendous returns, but they did that by putting large sums in to three or four stocks which multiplied more than twice in this period. It is important to say here that they did not put ALL their moneys in to these plays. They have their core investments in large blue chips and this was what I term as ‘extracurricular’ activities for them. They are good analysts and also understand markets. They know the risks and can afford to lose all the money they put in to this ‘extracurricular’ activity. .

One other thing I should point out to the active investors. On all the short term trades you will pay taxes. If you had put it in an equity mutual fund, a one year holding would have seen you pocket all the gains. Thus, direct investing is so much more demanding and challenging.

Let us come to the more important lesson that we can take away from this bull market. Frankly, I do not know how long this exuberance will last, but surely this is not a market level from which you can expect 2018 returns to be similar to 2017.

After every steep fall or correction in a market, which lasts for some time we will see no interest in stocks. No one wants to buy anything and most are busy licking their wounds. These times, the midcaps and the small caps sell off big. And when the next rally comes, the rally starts with the large cap stocks first. It is at that time, one could time the market and invest in mid/small cap equity funds. Once the big caps rally, the mid and small caps start to run and it is better to put money in to a mutual fund structure than to chase stocks on our own.

If we have to chase stocks on our own, then I would rather place very large bets on three or four stocks rather than divide the money in to twenty or thirty meaningless allocations. One could probably pick up three or four winners, but unlikely that anyone will pick up twenty big winners.

And if I am in a mid cap or a small cap mutual fund, the important thing is also about a timely exit. That needs less effort than timing the sell in each stock. Once you see the major events off and then the earnings begin to disappoint, stocks will start to fall off. And demanding valuations like what we have today, are a good time to pull off what we have.

 

 

Commodity cycle plays are rewarding and risky. There is no proven method, other than the adage of buy low sell high. The problem is in calling peaks and troughs of cycles. Today, the world has a gross overcapacity in production facilities of all commodities. There are imbalances depending on some bunched up demand or supply getting throttled or some environmental issues. The net result is that a long term investor in commodity companies can never be a content person.  Here is a piece I wrote for Deccan Chronicle of 3rd/4th December 2017)

The performance of corporate India, in aggregate, for the listed universe, is not very encouraging. Here is a snapshot as of 29-11-2017

 

Results declared                           2089

Positive profit growth                   1112

Negative profit growth                   867

Total Revenue Growth                     7.4%

Total EBIDT growth                        3.8%

Total Oper. Profit growth                2.6%

(Source- www.trendlyne.com)

 

This is only an average.  Different companies have different stories to tell. However, this is a market where tall tales find ready acceptance and helps someone to make a ‘buy’ decision. The latest reports (https://www.ndtv.com/business/nse-firms-q2-profit-growth-highest-in-six-quarters-1781479 ) is quite encouraging. It tells us that the NIFTY companies managed to increase their earnings by nearly twelve percent. This is surely an excellent number. See the various comments in the article that is referred to.

 

I have given a link  a table of the various NSE indices which show the valuation for different segments of the market. This clearly tells us what is happening and that too in the mid cap space. And the numbers probably hide the growth expectations behind the valuations.  (https://www.nseindia.com/products/content/equities/indices/indices_comparison.htm)

 

Let us take the example of a sector like “Metals”.  After a few dismal years, thanks to China, the sector is seeing a twin barreled growth.  A domestic thrust on infrastructure which pushes the demand and a lull in the China output which gives pricing power to the domestic producers. These result in some spectacular growth in profits on the back of some dismal past. Naturally, this exuberance pushes the prices of stocks and the valuation numbers do not tell the story. For example, if a company was having an EPS of 2 rupees, and the quarter ending September shows an EPS of 4 rupees, the index measures etc do not tell the facts. The historical PE will still be based on the EPS of 2 rupees for last year. On the other hand, the investors have already put in their estimates (say 10 rupees for this year). This probably explains the dichotomy.

 

However, what is genuinely a matter of concern is the exuberance of expectations. This growth from a supine position to a standing position, cannot be extrapolated in to the future.

Commodities go through price cycles. No one can predict the highs or the lows. In general, there is global overcapacities across commodities, with China being the fulcrum. China’s output and demand make a huge difference. In addition, many commodities, being natural resources, face environmental issues as well as regulatory issues in different countries.

 

We have seen commodity companies making losses, defaulting on their loans and then coming back in to prosperity. What happens is that somewhere, someone gives up something and the notional number of ‘capital employed’ shrinks. The earnings probably suffice to service this lower number.  The other thing that happens is that a favourable price movement and a higher capacity utilization both add to the profits number. A potent combination, where the first change from a poor financial health suddenly transforms to something shining.

 

Once the prices go up ( at best case a two year window) and new capacities do not come up, the returns continue to be high. Regulatory actions, tariff barriers all come in to play and knock the earnings back. The only permanent gain that remains is the lower notional number of “Capital Employed”.

 

Thus, the earnings growth, after the first blush will taper off. At that time, debate on valuations will start. Till then, enjoy the ride. Knowing when to get off a moving train, sometimes becomes important, when we play the commodity stocks.

 

R Balakrishnan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Index Name  Index P/E P/B Div Yield
Nifty 50 10370 26.53 3.49 1.07
Nifty Next 50 30040 36.84 3.51 1.04
Nifty 100 10793 27.85 3.50 1.07
Nifty 200 5689 29.90 3.46 0.99
Nifty 500 9254 31.78 3.38 0.93
Nifty Midcap 50 5288 104.05 2.62 0.50
Nifty Free Float Midcap 100 20098 51.54 2.83 0.93
Nifty Free Float Smallcap 100 8746 101.12 1.83 0.52
Nifty Auto 11406 40.63 6.13 0.54
Nifty Bank 25846 29.83 3.01 0.18
Nifty Energy 14319 16.33 2.01 1.72
Nifty Financial Services 10545 30.58 3.58 0.25
Nifty FMCG 25936 42.18 10.67 1.42
Nifty IT 11271 17.79 4.09 2.09
Nifty Media 3361 42.05 6.52 0.44
Nifty Metal 3736 16.74 1.72 3.55
Nifty MNC 13789 27.58 5.46 1.67
Nifty Pharma 9319 45.63 4.16 0.41
Nifty PSU Bank 3985 101.36 1.31 0.59
Nifty Realty 319 59.35 1.44 0.10
Nifty India Consumption 4862 58.00 5.75 0.83
Nifty Commodities 3980 18.18 2.10 2.73
Nifty Dividend Opportunities 50 2566 18.74 3.19 2.61
Nifty Infrastructure 3524 62.92 2.31 1.12
Nifty PSE 4257 14.48 1.97 3.79
Nifty Services Sector 13682 27.77 3.38 0.74
NIFTY SME EMERGE 1479 24.93 3.53 0.30
Nifty Private Bank 14206 29.37 3.30 0.12
Nifty Mahindra Group 10483 22.22 3.39 1.28
Nifty Full Smallcap 100 4427 61.48 2.20 0.38
Nifty Smallcap 250 6902 89.49 2.42 0.40
Nifty MidSmallcap 400 6920 62.45 3.02 0.45
Nifty Tata Group 5583 34.94 4.88 1.21
Nifty Midcap 150 6937 53.68 3.48 0.47

 

 

RATINGS UPGRADE FOR INDIA

(This was published in the Deccan Chronicle on the day after the ratings upgrade)

It is a heartening sign. The sovereign credit rating got upgraded to Baa2, from Baa3). It is a one notch upgrade.  In the ratings hierarchy, this is where we have been put:

 

(Image of table copied from http://www.nasser.ws/2011/10/rating-symbols-definitions-for-standard-poors-fitch-and-moodys/ )

The upgrade comes after years.  It is an acceptance of the fact that in the last three years, economic reforms have been of a high quality. It gives faith to the rating agency that we can manage to live within our means, with reasonable debt that can be regularly serviced.

This is noteworthy for an important reason that it comes at a time, when there is global economic weakness and every nation is actually spoiling its creditworthiness in mistaken efforts to sustain growth or stop a slowdown.

Some chronic ills have been addressed. Whether it is a clear shift from subsidies to direct transfers, using digital technology to minimize waste in targeted subsidies and taking important steps to clean up the PSU Banking space. The shift to GST is another event that is seen to be positive.

I am not commenting on where the rating was or where it ought to be. The important thing is that it is a rare UPGRADE in difficult times.  What is means is that it imparts confidence to capital. It will enhance the flow of capital to India. In my view, the single important thing that India needs is capital and this event boosts that. Thus, the benefits are going to be permanent and long lasting.

The rating changes sometime tends to be self-fulfilling. For instance, a Triple A rated entity attracts most money on best terms, helping it to grow faster and remain healthier. Similarly, this rating upgrade to our sovereign is also an indirect pressure that we continue this path.  Just to jog our memories, the Vajpayee regime has started to free the oil sector by freeing petroleum pricing. Unfortunately, a looming election halted that reform. And it took ten years to restore.

Thus, credit ratings are a reflection of things that happen outside a fiscal budget and cause long lasting impact on the fiscal situation in the future. I can always argue that India’s sovereign rating should be at A2 rather than Baa2, but do not have enough facts or views to challenge them. Ultimately, it is an independent agency’s opinion and one has to accept it.

In the market place, the level of ratings decide cost and availability of money. Many large investors/lenders base their decision on the credit rating levels. Thus, a higher level means more money at a lower cost. Further, at this borderline investment grade rating (Baa3 to Baa1), there would be many who feel psychologically more comfortable with a Baa2 than a Baa3. The logic is that Baa2 is at least two steps away from ‘junk’ and hence there is enough time to get out should something go wrong. The pricing and availability between “Investment” grade and ‘non-Investment” grade is very wide. Many doors just shut when there is a ‘non-investment’ grade borrower.

The rating upgrade is very positive news for the stock markets. While it may take more time for company earnings to catch up with the heightened valuations, this ratings upgrade would improve the flow of money in to the markets and keep the valuations in the upper ranges.

This upgrade probably helps the markets to build a base. Earnings improvement is still some time in to the future. Only thing is that there would be some short term build up of momentum. Focus on large cap stocks. As new money comes in, liquidity flow in the markets will shift in favour of large companies rather than small companies. Small company stocks may still soar, but the risks will keep increasing.

As investors, sticking to high quality continues to be important. Rating upgrade does not increase earnings. Valuations still continue to be challenging. When liquidity drives the markets, it is difficult to focus on quality. As an investor, nothing changes except the behaviour of the others. Stick to your processes and principles.

 

November 17, 2017

 

 

 

 

GOING DIGITAL – A suggestion to the PMO

Going Digital is the way forward. I think all are in agreement on this. There are some obvious places where the government CAN and SHOULD go digital IMMEDIATELY. Let me list out a few obvious places, which would help prevent lot of frauds and be in the public good.

 

  1. DOCTORS

On a public website, list out every doctor, name, year of passing and photograph. This will help weed out fakes and rogues. The details could also include names of doctors who are suspended / degrees cancelled etc.  Verification of qualifications becomes so much easier. Every recognized university should list the full details. Not very difficult.

  1. DEGREE HOLDERS, PROFESSIONAL QUALIFICATIONS ETC

Every institution that is recognized, whether it be IITs or CBSE or colleges, SHOULD put on their website, names and photos of every one who passed out of their academies, year wise. This will weed out those who submit fake papers for getting jobst etc. And will obviate the need for ‘certified’ true copies etc.

This is especially relevant for professional institutions like IIMs, IITs etc. Jobs are given before the results are out. Publicly available database of results will help weed out frauds.

These are two basic categories, which affect the public. This can be extended to various spheres of public impact areas. Whether it be IAS officers or Gazetted Officers or Public officials.

PUBLIC ACCESS OR RESTRICTED ACCESS?

Does this violate privacy? My answer is, NO. If necessary, the grades, the marks etc need not be made public. However, the fact of someone being a pass or a fail should not be hidden.

I am sure, if the government implements this, it would be of huge public benefit.

R Balakrishnan

 

ARE YOU BUYING MIDCAPS?

(This appears in Deccan Chronicle – http://epaper.deccanchronicle.com/articledetailpage.aspx?id=9339913)

As you try to exit the mid caps and you find that the scrip which was so easy to buy, is not shifted to “T to T” or “Cash” segment, selling becomes a full time operation. Enjoy the ride, take some money off also. )

THE BULL MARKET INVESTOR

I read a nice quote, which said that today’s stock prices are roaring so fast that the prices have landed in to the future. It carries a very subtle message. Markets celebrate every buy order with an uptick in prices. Bad news is greeted with ‘oh, it means the worst is over, let us buy NOW’. Every stock is a buy.

This is a market which gives you no time for thinking. The temptation to avoid process is very high. You sit down with the financials of a company and if you stupidly look at the price movements before you finish your analysis, you would despair.  Welcome to 1991. Welcome to 2000. Welcome to 2008. Welcome to 2017.

However, in this noise, I am trying to figure out some themes that will play out over the next few years.  Some of the factors at play, include:

  1. GST implementation could take two years to stabilize, but it does not seem to have dented corporate profits. Life goes on. And things shift from unorganized to organized. Things get better, bar the shouting;
  2. Consumption is the principal driver of the economy. Consumption that is aided and assisted by easy finance;
  3. Infrastructure spend is just beginning. On a scale that is unprecedented. There is a lot of action lined up;
  4. Company profitability can only go up from here;
  5. Liquidity is set to rise still higher as the FIIs will come back and domestic participation is rising day by day;
  6. PSU Banking sector looks set to bounce back to business as recapitalization plans announced, thereby increasing availability of funds for growth;
  7. Debt laden companies are getting a second life as banks are in a hurry to ‘resolve’ things and carry on with life;
  8. Valuations are not being discussed. As stock prices keep hitting new highs, the target multiples and prices also move up correspondingly;

The market mood is extremely buoyant. Mid cap stocks are the flavor. A small chat on a WhatsApp group and there is a ‘gap-up’ opening. Some speculators drop out. The seasoned punters get in and out, using a combination of inconsistent strategies (fashion for the times) to keep enlarging their portfolios. All that is needed for a price jump stretches from something earthshaking as announcement of quarterly results or a big brokerage house research report or the news of some contract coming the way of a company (does not matter that it is the routine business of the company) or the appointment or sacking of a key person or a celebrity mentioning the stock on social media.

In this bull market, there is no need for news to be earnings boosting. Mention gets a few percentage up on the stock any way.

And the ‘rumorists’ are having a field day. One speculative item in the social media and the stock price does high jumps. And then after a few days, a quiet ‘denial’ to the exchanges. The sheer magnitude is such that law enforcement will not just be able to catch up.

As a desperado in the stock markets, one has to now ‘anticipate’ which stock or group of stocks will be the prime & price movers on any given day. And the winner of the daily lottery is the one who has the best ‘hunch’ or the best ‘source’. And all the action is in the mid-cap and small cap space.

So what does one do? Either we are brave and ride the surf. Keep our eyes on the screen without blinking and press the ‘buy’ and/or ‘sell’ buttons without bothering to think about any ratios or business. I can see that this has become an occupation for many. Whether one makes profits or losses will depend on the character. In this day trading, you have to be brutal about not keeping a stock with you for long and be in love with prices rather than the company. This way, you also get to test your temperament.

For the more sober persons, who do not have a heart that is strong enough to bear the pressure, or for those who cannot spend the time needed, life becomes simpler. It is a good time to shift some money to large caps from mid caps. Not all sections of a market are equally valued. The large cap stocks will be less volatile. Will fall less than the mid caps, should the tide change. Correction can take two forms.  One is by prices going down to make valuations reasonable. The other one is by prices stuck in a range and earnings catching up over time. In effect, both mean that the ‘prospective’ returns for the asset class is lower than what one would like, at this point in time.

 

IPOs Ahead….

(This is a piece I had written for Moneylife in 2008- Before it became readable- the rough draft)

IPO’s and the merchant bankers- Takeaway for investors

Quotes from a newspaper:

“regulator’s inspection showed that the details of the promoters as mentioned in the IPO document were different from the one filed with the Reserve Bank of India.

, the merchant banker had not even verified the plant and machinery of the companies, the issues of which they had managed

one IPO, the regulator found out that the post-issue capital of the company was higher than its authorised capital —“

Above are some “omissions & commissions” by merchant bankers whilst managing IPO’s, according to a press report. The report also says that the regulator is likely to impose penalties on the merchant bankers concerned.

IPO business is funny business. Every issuer wants to sell shares at the highest possible price. Obviously, once an issuer short lists a few merchant bankers, then the actual choice would be made on who would offer the highest price. In any IPO, the fee is large. It could be a lowly 1% to as high as 5%. For an issuer, the total expenses can be in the range of 7 to 11% of the issue. Naturally, a 10% higher pricing means that the issue expenses are covered.

IPO’s, under the book building route can only proliferate in a bull market. In general, most IPO’s tend to be overpriced. All IPO pricing is based on some rosy picture of the future, so it is but natural that at least half of them will fail to live up to promises.

Once an IPO goes under water, the IPO investor feels cheated. Once many go, the noise levels increase. Investor forums start shouting and ask for action against lead managers etc.,

Firstly, no investor is forced by anyone to invest. He makes a conscious choice. He is being misled by the noise surrounding an IPO. He has no access to the prospectus or has no expertise to understand the same. So, he goes by his broker/friend/media views and plonks his money. Most investors I know want to keep flipping each IPO on allotment and move on to the next. One group just keeps piling up the IPO allotments. Over time, they sell where they see gains and hold on to the ones under water. In many cases, the reasons for holding on are psychological. Further, in each issue, the amounts involved are small (though it all adds up to a tidy sum) so there is a tendency to hang on. Over time, some of them become worthless and move on to the “vanishing companies” list.

What about the lead manager? To my mind, the lead manager/s should be punished only if there are compliance issues. If there are mis-statements, suppression of facts (which any due diligence should have thrown up) or any other act/omission which could have materially altered the story, then they should be punished. Here, the punishment should be severe and not nominal. I would say that suspending all the business of the entity for six months to a year plus a financial penalty which is at least four to five times the total fees involved in the issue should be levied. The penalty should hurt. A few lakhs does not make a difference to most merchant banks. Suspension of activities (all business done by the entity/group) in capital markets is a must. Only then would it hurt.

There would be instances where the lead manager is taken for a ride by the company. Such cases would be complex in nature. For instance, one of the cases cited above relates to the company filing some return with the RBI. It is very unlikely that the merchant banker would be able to verify this and to my knowledge, would not fall in the check list for due diligence. However, non-existence of plant and machinery is something that is amazing. So is the case of the authorised capital not being adequate. These are elementary errors and the punishment should be very severe. In fact, taking away the capital markets business licence would be a fit action in these cases. When a merchant banker takes on an IPO mandate, his responsibilities are huge. He may not have all the expertise himself, so he has to hire the right people to help him in this. On pricing, it is what the traffic can bear, so no issues with them. I would not blame a merchant banker on this. If he does this frequently, the market place would judge him over time.

Pricing is something we all like to hold the merchant banker responsible for. If an issue lists at a huge premium, then the issuer has lost. Similarly, if the issue lists at a discount, the investors get hurt. There is no answer to this. The merchant banker gets paid by the issuer. Naturally, his first loyalty lies there. As far as the investor is concerned, he has to take his call. There is no point in saying that if institutional investors put in money, they would have done their homework. World-over, there is an unholy nexus between institutional investors and merchant bankers (who also are brokers). The institutional investor can move more quickly, he has access to much more information than the retail investor would have.

The retail investor is all alone in this. The IPO grading system has been discussed in our magazine. Whilst it is a useful tool, it gives no help on pricing. This brings home the lesson that equity investments are fraught with risk. IPO investing is perhaps more risky than a secondary market investment. In the secondary market, you would have access to more information, research and price history. Further, in most IPO’s one has no idea about the management quality and capabilities. You may end up with a multi-bagger or end up with tissue paper. It is best to be cautious. In IPO’s, the advantage is typically with the issuer. He comes in at a time and price convenient to him. It need not coincide with what is good for an investor.

One issue relates to pricing disclosure. Whilst giving the mandate to a merchant banker, all issuers insist on a “price range” at which the merchant banker can place the shares. Without this, no issuer will give a mandate. However, the public get to know of a price only when the issue is about to open. All offer documents have a blank in the price disclosure. I understand that pricing can change, in tune with market conditions. However, why not give the indicative price band whilst filing the red herring or the draft prospectus with SEBI? This would give time to analysts to give their views on the issue. Today, most analysts do not get time to do this efficiently, because the price band fixation and the issue opening happens with a gap of a few days. This is something for the regulator to consider. Let the issuer be free to fix a totally different price when actually opening the issue. By giving the indicative price range up front, it would help the investor to take a better view and lead to more analysis and information to the potential investor.

The funny thing is that we all get introspective and rational when the markets are down. When a bull market resumes, all of us forget our lessons and plunge headlong in to putting our money back in to the markets, hoping to make a quick killing. By and large, IPO’s do give an opportunity to make money, depending on whose greed is greater at a point in time. In a bull market, the issuer takes advantage of the investor greed. In a bear market, unless the issuer is desperate, he waits it out.

 

 

August 23, 2008.

AXIS BANK- THE MIS-SELLER

One of the Axis Bank account holders got a ‘free’  Group Insurance policy from Apollo Munich insurance co. The account holders do not have a say in this.  Axis Bank gets noted as the insurance broker and in exchange has sold the data base of account holders. The account holder will now be a victim of calls and emails from the insurance company.

The account holder contacts AXIS Bank to get out of this mess and is directed to the Insurance company. It is a nice merry go round created by the crooked banksters in search of a few rupees of commission.

With bankers like AXIS BANK selling your information in an illegal manner, your privacy is shot to hell. And RBI may impose some idiotic fine of a few rupees and let the dishonesty continue

Wonder if RBI or IRDA or anyone has anything to say on this.

Of course, it is useless to expect any degree of honesty or ethics from this shady bank which has its roots in the erstwhile scam tainted Unit Trust of India.